THE CUTTING EDGE

Showdown on the Web : Microsoft, Netscape Battle for Net Dominance

MOUNTAIN VIEW, Calif. — The atmosphere is a bit tense these days at the Netscape Communications Corp. campus here, and it's not hard to see why: The 2-year-old upstart, despite its remarkable success in establishing its software as the standard for the Internet, is now entering the critical phase of a life-and-death struggle with Microsoft Corp.

At stake is nothing less than control over software standards for the Internet--and the powerful influence over a wide range of next-generation computing technologies that such control would bring. Until recently, Netscape enjoyed a comfortable lead, but Microsoft, making an impressive recovery from some early stumbles, is quickly closing the gap.

In the past six months, Microsoft has released three new versions of Internet Explorer, its "browser" software for the World Wide Web, with the latest considered by many analysts to be nearly as good as Netscape's Navigator. It has boosted its share of the browser market from close to zero to 7%, according to the market research firm Dataquest, and stands to gain even more via an agreement making Internet Explorer the preferred browser on America Online.

Microsoft is giving away its Internet "server" software for Internet host computers--where Netscape had once hoped to make most of its money--for free to anyone who buys its Windows NT software operating system, thus threatening one of Netscape's most important long-term profit centers. Netscape shares dropped $4 last week to $58.25 on investor fears that earnings will fall short of expectations.

And more generally, the Redmond, Wash.-based giant has vowed to use every arrow in its overstuffed quiver--most importantly, the immense and growing base of computers that use its Windows operating system--to defeat one of the few companies that could seriously damage its sprawling empire.

"Look, they caught us by surprise at a time when we were very busy," Steve Ballmer, Microsoft senior vice president, says of Netscape. "But we came from behind--far behind--in spreadsheets and word processors, and look where we are today. In Internet time, they are not that far ahead."

At Netscape, whose second-quarter sales of $55 million were about one-fortieth those of Microsoft, the tone is simultaneously dismissive and defensive. "Everything Microsoft does is to boost Windows or Back Office because that's where the money is coming from," says Netscape co-founder Marc Andreessen. "But that cripples their ability to compete."

Netscape President Jim Barksdale strikes a less combative note: "I don't know why they think they need to put us out of business to be successful," he says. "We're just a small outfit compared to a company with the size and breadth of Microsoft."

As the two companies battle for market share--and for the nebulous but important psychological edge that's known in the business as mind-share--they're running every play in the marketing book.

On the day Netscape was holding an important technical briefing last month, for example, Microsoft manager Michael Hebert was phoning reporters and vowing to expose "the Netscape myth."

"Netscape is trying to build a really broad set of products with a small group of engineers," Hebert said conspiratorially. "They really don't have good quality-assurance procedures in place."

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When pressed, though, Hebert couldn't cite any examples of faulty products having slipped through Netscape quality control. "I don't want to give any specifics because to be honest, I don't know of any," he conceded.

Microsoft recently hired a little-known market research firm to "prove" that Netscape's browser is not as popular as commonly thought. Predictably, the Microsoft-commissioned report put Netscape's share at 60% rather than the roughly 80% reported by the top market research firms like Dataquest.

Netscape quickly lashed back with its own study, which determined that its browser was not only the Internet leader, but the most popular single piece of computer software of all time. Both companies posted their findings on the Web, where they joined a set of warring white papers that each uses to tout its own products and strategies while denigrating their rivals'.

More concretely, Microsoft scored a coup with the America Online deal, under which Internet Explorer will be the preferred browser for more than 5 million AOL members, in exchange for Microsoft's giving AOL a preferred placement in Windows 95. No one was more surprised by that agreement than Netscape, which had tried to cut a similar deal with AOL, even offering a board seat and an equity investment.

"When something like this happens, you find out who your real friends are," Andreessen said afterward.